DBRS Confirms Komatsu at A (low), Stable Trend

DBRS has today confirmed Komatsu Ltd.’s (Komatsu or the Company) Issuer Rating at A (low). The trend is Stable following improved operating performance this fiscal year, which was expected by DBRS. The ratings remain underpinned by the Company’s strong business profile as the second largest global construction and mining equipment manufacturer. The Stable trend reflects industry conditions that, subsequent to the global economic downturn, have markedly improved across most of the Company’s key end-markets; DBRS expects this improvement to persist over the near to medium term.

Komatsu’s results through the first nine months of fiscal 2010 (FY 2010, ending March 31, 2011) were substantially stronger vis-à-vis prior-year levels. While demand progressively recovered in developed markets such as Europe, the Americas and the Company’s native Japan, sharp ongoing growth in emerging markets such as China, as well as Asia and Oceania, proved much more significant in bolstering sales, which in total increased by 30% year-over-year. (China represents the Company’s fastest-growing market and will likely soon represent Komatsu’s largest market altogether.) The higher volumes, firmer pricing and achieved efficiencies more than offset ongoing foreign exchange headwinds. The Company’s total operating profit for the three quarters ending December 31, 2010, approached ¥170 billion, which is fourfold the similar prior-year period’s weak results (due primarily to severe industry conditions) and represents a solid operating margin of approximately 13%.

With respect to the recent earthquake and tsunami in Japan, DBRS notes that, while Komatsu’s operations in the affected region were initially impacted, production has since essentially resumed. While the Company acknowledges that there could still be future disruptions in production attributable to power supply shortages and/or problems in the supply base, it is considered that this will not materially adversely affect Komatsu’s operating performance.

Going forward, DBRS expects the Company’s results to continue improving, with earnings over the near to medium term approaching historical norms in line with the projected protracted recovery of mature markets, supplemented by strong ongoing growth in emerging markets. Komatsu is also well positioned given its exposure to the mining sector, where significant additional investment is expected. Finally, Komatsu’s proprietary tracking system KOMTRAX (which generates IT-based market information), provides the Company with increasingly accurate demand forecasts as well as a flexible production system, thereby increasing efficiency.

DBRS notes that this improving performance has significantly strengthened the Company’s financial profile, which has reverted to levels consistent with the assigned ratings. Cash flow and coverage measures in particular are well commensurate with the ratings. While Komatsu’s debt remains somewhat elevated for the ratings, DBRS notes that the Company has adopted a conservative financial policy and acknowledges that its current indebtedness exceeds targeted levels. In light of this and amid constrained capital expenditures that are expected to persist over the near term, DBRS expects Komatsu’s leverage to continue decreasing going forward.

DBRS expects the ratings to remain constant. Downside to the rating would appear limited, in line with improving industry conditions and given the expected improvement in the Company’s financial profile.

Notes:
All amounts are in Japanese yen unless otherwise indicated.

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.